The Eurozone is about to face its biggest test. 

Italy's short-term government bond yields are on pace for their biggest single-day gain in more than 15 years Tuesday as investors scramble to re-price risk linked to Europe's third-largest economy amid concerns that new elections could be fought on the country's membership of the single currency. 

Italy's benchmark 2-year government bond yields were marked 1.23% higher from yesterday's close in early Milan trading, the biggest single-day gain since 1992, and changing hands at 2.27% by mid-morning. Benchmark 10-year bonds were quoted 45 basis points higher from yesterday at 3.13%, well past the mark that Morgan Stanley warned would ignite contagion amongst the domestic Italian banks that hold them and 3.14% higher than triple-A rated German bunds.

"Italy knows the rules. They might want to read them again," said European Central Bank Vice President Vitor Constancio in an interview published by German's Spiegel magazine, a comment that may dampen speculation of a near-term intervention from the central bank. 

The moves followed a decision by Italy's Prime Minister-designate, Giuseppe Conte, to abandon plans to form a government after President Sergio Mattarella refused to accept the appointment of Paolo Savona, an 82-year old economist and vocal anti-euro critic, to the post of finance minister. Mattarella will now attempt to form a "technocratic" government this week, led by a former International Monetary Fund official Carlo Cottarelli, but that is unlikely to survive a confidence vote in parliament, meaning Italy will likely return to the polls in the fall to elect a new leadership that could seek an exit from the single currency.

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"The uncertainty over our position has alarmed investors and savers both in Italy and abroad," Mattarella said Monday. "Membership of the euro is a fundamental choice. If we want to discuss it, then we should do so in a serious fashion."

The euro fell 0.8% against the U.S. dollar, on track for its biggest fall since early March to trade at 1.1550 by mid-morning in London.

With both the Five Star Movement (M5S) and Lega parties holding a majority in both houses of Italy's parliament, Mattarella's technocratic government won't likely survive a confidence vote, meaning Italy will face new elections in the autumn - a vote which could be a de-facto referendum on Italy's membership in the single currency. 

Deutsche Bank (DB) - Get Deutsche Bank AG Report  shares were marked 3.77% lower in Frankfurt, with investors marking the stock down based on, at least in part, data from its 2017 annual report that showed Italian bonds represent a third of its net €3.1 billion in sovereign debt exposure, while French banks such as BNP Paribas SA (BNPQY)  (-3.66%) and Credit Agricole SA (CRARY)  (-3.21%) hold around €19.2 billion and €10.6 billion, respectively, on their balance sheets.

The Stoxx Europe 600 index fell 1.5% to 383.97 points in the opening hour of trading trading as investors piled into safe-have assets, taking the yield on 10-year German bunds to 0.20% and pushing the euro past a six month low of 1.1541 against the greenback.

Bank stocks led the decline in broader European trading as well as in Italy, with the Stoxx 600 Banks index falling 3.3% to its lowest level since February 2017. Germany's two biggest lenders, Deutsche Bank AG (DB) - Get Deutsche Bank AG Report and Commerzbank AG (CRZBY) , fell 3.77% and 4.57% respectively in the opening 45 minutes of trading while Italy's Intesa Sanpaolo (ISNPY) slumped 5.19%, UniCredit SpA (UNCRY) slid 5.02%. Spain's Banco Santander (SAN) - Get Banco Santander S.A. Sponsored ADR Report was marked 5.09% lower by late-morning in Frankfurt.